Greetings, and welcome to the Leidos Fourth Quarter 2018 Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kelly Hernandez, Investor Relations for Leidos. Please go ahead, Kelly..

Thank you, Kevin, and good morning, everyone. I'd like to welcome you to our fourth quarter and full year 2018 earnings conference call. Joining me today are Roger Krone, our Chairman and CEO; Jim Reagan, our Chief Financial Officer; and other members of the Leidos management team.

Today, we will discuss our results for the quarter ending December 28, 2018. Roger will lead off the call with notable highlights from the quarter as well as comments on the market environment and our company strategy. Jim will follow with a discussion of our financial performance and our guidance expectations.

After these remarks from Roger and Jim, we'll open the call for your questions. Today's discussion contains forward-looking statements based on the environment as we currently see it, and as such, does include risks and uncertainties.

Please refer to our press release for more information on the specific risk factors that could cause actual results to differ materially. Finally, during the call, we will discuss GAAP and non-GAAP financial measures.

A reconciliation between the 2 is included in the press release that we issued this morning and is also available in the presentation slides. The press release and presentation as well as the supplementary financial information file are provided on the Investor Relations section of our website at ir.leidos.com.

With that, I'll turn the call over to Roger Krone..

the strength of our technical solution, the competitiveness of our cost structure and our past performance credentials, all made possible by our talented and dedicated employees. Further, it's clear that customers have confidence in our ability to solve their large, complex problems because of our size, scale and depth.

We continue to strengthen across all of these areas, including investing in our internal R&D so we can offer increasingly advanced technical solutions. One particular area where we have seen strong customer enthusiasm is in the application of artificial intelligence and machine learning.

These technologies drive efficiencies in our customers' mission, through automation and also provide deep analytical insight at speed. We also invest in AI/ML security to make all of our data-rich information technology offerings the most reliable and secure in the industry.

Our AI/ML capabilities have already been instrumental to several recent program wins with our defense and intelligence customers. With our anticipated growth, we'll need more people to join the company.

I'm pleased to say we have seen improvement in our hiring statistics, as our recruiting and HR teams have implemented innovative methods to improve our success and efficiency in hiring new employees as well as improved retention rates of our existing employees.

We are also optimistic on the potential for a more efficient security clearance process with the renewed focus on this effort by the Department of Defense, which recently assumed the function from the Office of Personnel Management.

When in place, this increased efficiency will mean that our employees spend less time waiting to start work on classified programs. We're finding the process is a complex undertaking that will take time to implement, but we are encouraged by the initial progress. Now we all continue to watch what is going on in the federal government.

We are pleased with the last week's budget agreement that averts another shutdown. Even a partial shutdown impacts a broad array of vital government services that touch millions of Americans and impacts the important mission of our customers.

While there is still uncertainty on the debt ceiling limits and the sequester caps, we remain optimistic about the actual budgets that will be agreed upon and the spending priorities in government fiscal 2020 and beyond.

As we analyze the budgetary activity beyond the headlines, we are encouraged that the government spending priorities align well with our strategy and our areas of technical strength, keeping us well-positioned to drive growth.

Finally, I'm pleased to announce that we have set May 14 as the date of our Investor Day, which will be held in New York City as well as being webcast. The leadership team and I look forward to sharing our vision for the company and more details about our strategy at the event. I hope you will find time to join us.

With that, I'll turn the call over to Jim Reagan, our Chief Financial Officer, for more details on our 2018 results and our 2019 outlook..

revenue growth, margins and bookings. Revenue grew nearly 13% over the prior year and roughly 12% sequentially. This growth largely reflects the slippage of some revenues from the third quarter into the fourth quarter as we discussed in our third quarter call. Margins in our Health business expanded in tandem with the revenue growth.

Non-GAAP operating income margin of 16.1% in the fourth quarter increased more than 400 basis points from the prior year and 190 basis points sequentially. For the full year, non-GAAP operating margins of 15.2% increased 30 basis points from the prior year.

The margin expansion reflects a greater mix of on-contract growth in certain quick-turn, fixed-unit-price contracts. The Health segment also had a very strong year in awards activity with full year net bookings of $3.2 billion, roughly 75% higher than the prior year level, resulting in a 1.7x book-to-bill for the year.

During the fourth quarter, we booked $1.1 billion into backlog in the Health segment, resulting in a book-to-bill of 2.2. Overall, all of our businesses demonstrated solid progress in the fourth quarter towards our growth targets, and we expect all segments to grow in 2019.

Now before I talk about 2019 guidance, I want to comment on the government shutdown and its impacts to our business. For fiscal year 2018, the shutdown was in effect for 4 working days at the very end of the year, where we typically see heavy vacation usage, so there was minimal impact to our business.

The shutdown did, however, force the closure of the Committee on Foreign Investments in the United States, or CFIUS, which was the last approval needed to allow for the closure of our commercial cyber sale. We continue to work the process, and we expect that deal to close within the first quarter of 2019.

For 2019, the shutdown impacts to our business are also relatively immaterial. But given the volume of questions we've received on this, I'll provide some context. First, we estimate our aggregate revenue impact resulting from the shutdown to be approximately $11 million.

This effect is largely isolated to our Civil segment, where some of our work for the FAA and the Department of Homeland Security were deemed nonessential, causing us to furlough some employees. We realize the effect that this had on those employees, and it was not a step taken lightly.

We may be able to recover some of this revenue loss throughout the year, but it is too early to estimate any recovery now. The shutdown also caused some delays in the billing and collection cycle as well as with award decisions. But these effects are more timing related, and we don't expect any permanent impacts to our business from those delays.

Now on to our guidance for 2019. We expect revenue in the range of $10.5 billion to $10.9 billion, reflecting growth of 3% to 7% from 2018.

We expect 2019 to be a year in which we will exceed our 3% long-term revenue target growth due to the strength of our backlog entering the year and our focus on driving on-contract growth and winning new business throughout the year.

Although we do not guide on a quarterly basis, I would like to provide some context on the quarterly phasing of revenues for the year and particularly for the first quarter. Similar to 2018, we expect revenues to build sequentially throughout the year, starting from a low point in the first quarter.

Historically, Q1 revenues declined sequentially due to the lower level of material volumes compared to Q4. This year, however, we expect a greater sequential decline in the high single-digit range due to the combined effects of low materials buying in the first quarter, program transitions in our Health segment and the shutdown.

From the first quarter low, however, we expect revenues to grow sequentially throughout the year and to drive to our full year revenue guidance. We expect adjusted EBITDA margins of 9.9% to 10.1% for the year, a slight decrease compared to 2018.

And as we've said in the past, there is a trade-off between margin and revenue growth, and the ramp-up of our new awards will drive slightly lower margin levels in the near term. We expect non-GAAP EPS between $4.25 and $4.60.

We expect operating cash flow of at least $725 million, a slight increase from 2018 levels after adjusting for the interest rate swap monetization and the usually low cash tax rate we experienced in 2018.

Following the fourth quarter sale of our San Diego building, we will move into the more material phase of our real estate consolidation activities in 2019. We will continue to streamline our footprint and reduce owned facilities, allowing us to work more efficiently and increase the level of collaboration across our functions.

As a result of these actions, we expect a lot of moving parts to the different components of our cash flow statement this year. So we've added a slide, Slide 10, in our earnings deck, which is available on our website, to help you with some of the details.

Some of the real estate action increased CapEx and, therefore, reduced the free cash flow metric, while others result in inflows in cash in investing and financing activities.

At the end of the day, the net of all of our balance sheet monetization activities and our real estate investments will yield a positive cash inflow for the company, and we will continue to deploy our excess cash from those transactions consistent with our stated capital deployment plan.

All that said, we expect 2019 capital expenditures of between $135 million and $140 million. Roughly $60 million of that is related to real estate investments and leasehold improvements, which will drive better asset utilization.

As we've said earlier, between the San Diego and Gaithersburg real estate sales, we have already closed on transactions that will drive $95 million inflows to cash from investing in the first quarter. These inflows will more than offset the onetime $60 million CapEx item that I referred to earlier.

Beyond leaning out our real estate portfolio, we will continue to look for opportunities to monetize the balance sheet, which increases our flexibility and drive value for our shareholders. Now a couple of other comments to help you with modeling 2019.

We expect net interest expense between $135 million to $140 million and a non-GAAP tax rate between 23% and 24%. To wrap up, we closed the year on strong footing. We generated over 3/4 of $1 billion of cash from operations.

Our margins were again over target for the second year in a row, and we exited the year with a revenue growth rate of 5.2% and record backlog. We remain focused on continuing this momentum into 2019 by driving profitable growth and generating cash to drive long-term value. With that, I'll turn the call over to Kevin, so we can take some questions..

[Operator Instructions]. Our first question today is coming from Cai Von Rumohr from Cowen and Company..

Maybe you can help us understand like what is in your guide for 2019. Does this include anything for NEST? Does it include the commercial cyber business that you hope to close? And then maybe some color on the adjusted EBITDA margin, which looks like it's at the bottom of your expectations..

Yes, first is that the guide does include our expectations for the ramp-up of NASA NEST. The guide does not include the commercial cyber business.

And in terms of the -- our EBITDA margin expectations for the year, it reflects the fact that in 2019, we've got a number of programs, the Army Corps of Engineers program, NASA NEST, just to name a couple of them, where the ramp-up of those programs typically has lower margin than for the life of the program, and we've been historically pretty conservative in setting those -- the profit take-up levels early in the program as we plan on some contingencies.

As programs reach the end of their lives and we start to wind them down, that's typically when you get more liquidation of risk, and we pick up some write-ups, as you've seen us historically have in the past..

Terrific. And then for a last one, maybe update us on where you are with GENESIS..

Yes, great. Cai, I'd be happy to take that one. So yes, we're really pleased with the program, our relationship with the customer, solid support in DHA for moving forward, a lot of enthusiasm over what's happened at the IOC sites, and how we've learned from our initial deployments. We have agreement on a full schedule for deployments.

We're currently working on -- what we call Wave 1. We've identified the different groups of hospitals we're going to deploy to. We expect Wave 1 to go live in the fall. The next wave, not to confuse you, was actually going to be Wave 4, and we'll expect to start that later in the year. And then we should be running a new wave about every 6 months.

At any one time, we will be in deployment of two waves concurrently. A lot of great discussions with our customers. We've got agreement on the go-forward plan. We should be fully deployed by 2025 and, Cai, as you know, the program is expected to extend to about -- excuse me, 2023 fully deployed, and the program runs through 2025.

I know you've often asked in the past about sort of a ramp-up in revenues, and we expect to see that this year. But maybe we'll give a sort of a point at a top line, something like that. And again, very enthusiastic about the program, great relationship with our customer, DHA.

Their strong commitment to put this technology in place to increase the health care for our active military..

Our next question is coming from Krishna Sinha of Vertical Research Partners..

On your operating cash flow guidance for the year, obviously, I see the slide about the real estate, but I'm just talking about the operating cash flow.

Can you just give us some puts and takes there about what you're expecting? What's not being included or not recurring from 2018 to 2019? And just kind of what we can expect from the forward trajectory may be beyond 2019 in terms of cash flow for the business on an underlying basis?.

Sure, Krishna. Thanks for the question. The two big things that occurred in 2018, which are not recurring in 2019, and that's reflected in the go-forward guide.

First, we -- as part of monetizing the balance sheet, we took $60 million of cash for interest rate swaps that we could monetize in conjunction with extending the term of our term loan facility. The second thing is we had some opportunities to monetize some deferred tax assets. Now these were tax assets that were fully reserved anyway.

So -- but that was $65 million of cash that we pulled in. That's also reflected in the GAAP -- I'm sorry, the GAAP effective tax rate of about 4.5%. So those things aren't for recurring, although we are always looking for opportunities to improve on our tax rate. So those are the big things.

And then there are also a couple of items, and they're primarily program related. One of the large contracts that we just won will require us to buy some assets, and that's a roughly $40 million cash flow headwind that we will end up recouping over the life of the program..

Our next question is coming from Robert Spingarn from Crédit Suisse..

I wanted to ask a high-level question about the guidance from a segment perspective. In other words, how you're thinking about the growth across the segments, and then the same for the margins. And this has to do with just some of the movement that we see in 2018, especially sequentially with regard to margin.

So Jim, if you could give us some understanding, some color there by segment..

Sure. Well, Rob, I'll remind you, we don't guide by segment.

But what I can give you some color on is, first of all -- because we're expecting all of the segments to be growing with some fairly large program wins, as I mentioned when I was answering Cai's question, some of these larger programs tend to have margin profiles that ramp up as we increase the operating efficiency of these contracts.

We're probably expecting a little bit more growth in the Health segment and in the defense segment as compared to the other segments of the business because of the large program wins that we've had and the pace of the ramp-up in both defense and in Health.

As Roger mentioned, we're getting a full point of growth just off of the DHMSM program, so I think that, that helps you with kind of setting up what the growth profile is like of the segments..

What are the biggest swings in your revenue guide, that $400 million program wise? Or how do we think about what you're assuming at the low and high end?.

Well, you mean -- I think what I'm understanding, you're wondering, well, what could give rise to the low end. What could give rise to the high end? Well....

Yes, the $10.5 billion versus the $10.9 billion..

Yes, I mean, we've got a lot of bids that are -- we've $20 billion of bids outstanding at the end of the year. One of them, we've already pulled in from bids outstanding and into backlog, and there's the NASA NEST program, which was a takeaway, meaning it's obviously additive to our growth profile. That's reflected in our guide.

And I think that the high end would be achieved if we kind of ran the table on the big ones and set us up for a 2020 that is growing at or potentially above what we're guiding to now. On the low end, it would be a significant drop in our win rates.

And we -- for the last year, we've been experiencing win rates that reflect, first, a very competitive cost position that is now showing up in the velocity of new awards. The second is we have a well-defined set of technical differentiators that is probably more prominent in our win rates than the cost competitiveness.

And third, the efficiency of our business development process is not only yielding great technical scores, but it is reducing the cost that we need to put into winning X dollars of new backlog.

So I mean, those 3 things are really bearing out what I think gives us the confidence of at least the midpoint of our revenue guide, if not a little bit more..

Hey Rob, it's Roger. Just a quick follow-up on the NASA program. We are still in that kind of unique period between announcement and debrief and the protest period, so we have a couple more days to go to see whether one of the competitors is going to file a protest. So we haven't exactly put that into backlog yet.

And when we do, it's a single-award IDIQ, and we'll probably book the first cash order there just so that people don't go out and put $2.9 billion in backlog. It's probably likely in the order above -- in the hundreds of millions, not in the billions.

But that's just a technical point I wanted to make sure that I was clear in my comments, that it's still subject to protest. Thanks..

And Roger, just on the back of that, are there any specific awards that you would call out as being within the revenue synergies that at the time of the deal, you weren't yet ready to talk about? But now a few years in here, what are you seeing revenue synergy wise?.

Well, Rob, that's a great question, but it's one we haven't had for a while. Well, NASA NEST is clearly one.

That is a program that really has come out of capabilities that came across in the merger with IS&GS and the combination of some of the things that we had done on the technology side and the cyber, and the relationship that IS&GS had with the end user at NASA is part of that.

I would say, I think our probably of win on Hanford is enhanced by bringing the company together. Clearly, that was heritage IS&GS contract, but I think we added more innovation in our offering.

You can look at maybe next gen, I think, with the same view, a program we might or might not have bid as stand-alone Leidos but clearly felt we had a compelling offering to bring forward to the program. And just to kind of round out the SENS3 program and the Department of Homeland Security, one that we won last year.

I think I would put in synergy we won an ABIS contract, which is an Army biometrics win, which is a collection of sort of IT and technology to be able to recognize individuals based upon biometric senders, a whole host of classified wins.

I talked to AI/ML through my comments, and that has been of particular interest in the intelligence community, and it's led to some wins there as well.

So really a lot of -- we talk a lot about synergy, but a lot of cross linkages of the 2 business and a lot of strength in things that we can go after that we couldn't have gone before, and then overall increase in our RFP win..

[Operator Instructions]. Our next question is coming from Jon Raviv from Citi..

Jim, can you walk us through just some of -- a little bit more on the risks and opportunities in this year's sales guidance. And I'm thinking about it specifically in relation to a year ago, where, obviously, you fell a bit short in '18.

I just want to make sure that the bias is really more to the upside in this year's guidance versus last year's guidance..

Sure. Well, we always like to hit the guidance down the middle of the fairway. The NASA NEST win certainly gives us a little bit more confidence as it's yet another takeaway win, which builds the revenue volume and adds to our growth.

So just to put a little bit more color on my comments of just a minute ago, I will repeat continuing to run at high win rates on takeaway and new business work, new contract awards that are kind of new to our peer group. That's one.

And we have -- we continue to see really great results in win rates that reflect to the execution in our business development teams.

Going back to one of the things that could be a dampener of our growth rate and that would be if the clearance process slows down or if the hand off from OPM to DoD doesn't go as I think DoD or we would expect, I think that, that could be one risk factor to revenue growth.

And then the second one would be kind of a change in the success that we've been experiencing in business development. That an dour hiring processes, so far, we're pleased with what we are seeing out of our recruiting teams.

But if the labor market has a sudden tightening from where we see it today, that could slow down our ability to hire people needed to execute on contract backlog..

Okay, and then in terms of some of the bigger recompetes this year, can you just potentially give a little more color, perhaps even quantify some of that exposure in terms of sales but also in terms of profits? And the docs make it look like Hanford, big on sales but doesn't add much income.

Could you just level set us on this, please?.

Yes, well, you just mentioned, Hanford and probably the other large recompetes that we have is GSM-O, which we don't disclose the dollar values of both the revenue run rate or the margin details at the contract level. But clearly, GSM-O, gizmo, would be one that we're planning on rewinning.

And if we get surprised on that one, that could be a dampener, not so much for 2019, though, but more for 2020, as that contract, regardless of the outcome is going to continue to run well into 2019 for us..

Our next question is coming from Noah Poponak from Goldman Sachs..

It's Gavin on for Noah. Nice to see booking strength translating to revenue growth, but I think the margin pressures made it kind of right in line with that 10% plus you were talking about, which maybe seems like a lot of pressure just on the rate of growth you're experiencing.

So I was wondering if you could talk a little bit about your strategy to grow EBITDA dollars. And Roger, I appreciate the color that early on, the contract's at lower margins and later on, you can book them at a higher margin.

But whether or not these will be accretive on average over the life of the contracts and how you think about bidding when the margin initially is this low..

Well, okay, complex question. Let me see if I can unpack you a little bit, then I'll look to Jim. Let's see, we have a pipeline and we kind of filter against the pipeline. And we look at the structure of the contract and our ability to generate at or our target over the life of the program.

We are in a fortunate position where we can decide what to bid and what not to bid. We've talked in the past about staying away from what we used to call lowest price, technically acceptable because it traditionally has lower margin and frankly, it's probably not the work that we are best equipped to do.

We become interested in a program where we can create a point of difference through our discriminators, our technology, our cost structure and our size. And as such, we hope over the life of the program, right, to be accretive to our long-term EBITDA margin. The -- I think it was Jon who talked about Hanford.

There are some programs, just by their nature, are going to be lower. Hanford is one of them. Has always been, that particular customer, just views the programs differently. Hanford's a very important program to us.

We use it for a lot of past performance quals by which a hugely important program for the nation in cleaning up the 600 square mile site in southeast Washington is really, really important work. But generally, we are looking at the portfolio and the pipeline with an eye to 10% or better on EBITDA.

I think you reemphasize is that often, when we get started, we're more thoughtful about our booking rate and how we ramp up. And if programs are going to have transition issues, it's usually in the first year or so. So it behooves us, and I think everyone in the industry does this, to be more thoughtful about our earnings rate in the early contract.

But because of our technological differentiators, we have the luxury to go after higher value-added work, which typically carries more margin with it..

Got it. And then, Roger, you talked about the DoD budget aligning well with your portfolio.

Can you give us a little bit more color on kind of how you expect those priorities to go between hardware and kind of your addressable market?.

Well, yes, there -- Secretary Shanahan is in, I think, in the first year or 2, they were looking at operational capability rate and getting the fleet and other hardware back up to a higher operational tempo. We certainly benefit from that.

They're now focused towards buying end items, ships and tanks and airplanes, but not necessarily at the expense of their operational tempo. What really excites me is the digital transformation that's going on not only in the Department of Defense but across federal space, very large.

They have gone to operate more efficiency, to open up more total obligation authority to buy hardware and to pay troops and to defend the country. And that's right in our sweet spot. We're really, really good at digital transformation, move to the cloud, software-defined networks, and that gets us excited.

But we're also seeing a bit of a shift in how, I think, the department views the threat and a lot of discussion, if you read the National Security Strategy is what we call the physical and the kinetic threat is still important, but the virtual threat is becoming even more important, what's going on in cyberspace, some of the newer technologies.

And that fits really well with where we are. We're not necessarily a company that builds tanks and big aircraft carriers and things like that. We are much more in the soft technologies, software, cyber, areas like that, electronic warfare, and we see increased spending in those areas..

Our next question is coming from Greg Konrad from Jefferies..

A really strong booking year and quarter.

Can you maybe talk about some of the initiatives outside of DHMSM in place that's supporting both the improvement in bookings and the revenue outlook for next year?.

Yes, I think so. So this is Roger. And if you've been following our story for a while, you know that about two years ago, we had lost some programs that we thought were franchised. And it really caused us to go back and look at our whole business development process from cradle to grave.

And we looked at what we call our win plan, how we write proposals, the staff that we had, how we view the competitive discriminators. And as we've said frankly often on this call over the past several quarters, we kind of started over.

We took a clean sheet and Gerry Fasano and now Roy Stevens in business development, and we looked at why we were winning, and why we were losing, and how we presented our competitive discriminators. Even down to what bids that we were bidding on and whether we really felt we had a compelling point of difference on those bids.

And I would say I think we've gotten better across the board, better in identifying the opportunity, putting it in the pipeline, working early in the bid process with the customers to understand what their compelling needs actually were.

And then just the way we go about actually structuring and writing a proposal, how we deal with the proposal center, how well we represent our capabilities in between the front cover and the back cover of the proposal.

Another point that we made that's really all the way through this journey from the acquisition is there was, I think, a thought that IS&GS, the Lockheed business, had become less cost competitive in some of the bids that they had made kind of being tucked inside a large OEM.

And we had huge emphasis on bringing their overhead and SG&A their wrap rates down to where we had been historically. And we look at our wins and our losses, we do a lot of forensics. And I wouldn't say we have not lost any bids based upon price, but the number of bids that we have lost based upon our cost structure is down to just a very, very few.

And so we are pleased with how we have used our cost structure to solve that problem, and that has allowed us to focus on superior technical offerings that create a point of difference for the customer..

And just a follow up on your commentary around employees and employment.

Is there any way to think about headcount growth for the year? And are you seeing any signs of any type of wage inflation?.

Yes, Greg, we don't provide headcount targets. I can tell you that, yes, compared to what our internal targets are, we're doing well in growing our direct employees compared to our plan.

And then the other thing on wage inflation, we do put a plan in place for growth in market salaries that is consistent with the benchmarks that we see published externally. And so far we're not seeing any pressure on those assumptions that we have on our plan. It -- the market is, obviously, pretty competitive for the kinds of people we are hiring.

But given our scale and given the breadth of different things that people can work on here at a competitive salary and benefit structure, so far, we're able to achieve our hiring numbers..

Our next question today is coming from Rick Eskelsen from Wells Fargo Securities..

Just to clarify on the guidance commentary for the DHMSM contract, just -- it's 1 point to growth throughout the guidance? Or is it that 1 point addition at the high end? And then also, can you talk about any grow-over amount for the commercial cyber, which I believe you said was not in the forward guidance?.

Yes, so the way, first of all, we think about DHMSM is that 1 point of growth is inclusive of the -- our guidance implies 5% growth. That number includes roughly a point for DHMSM. The second point to commercial cyber, the commercial cyber number, that midpoint of growth would be higher if you back the commercial cyber number out of our 2018 results.

But at this point, we have to keep those -- those numbers confidential per terms of our agreement with the buyer..

Our next question is coming from Tobey Sommer from SunTrust..

With respect to your comment on the budget and having a constructive outlook, does your commentary for the defense and intelligence budget hold true for the whole budget, including Civil? And could you comment if currencies take a little bit of edge off of your revenue growth guidance for '19?.

I'll do the first one. I think that was a foreign exchange question on the second one. Let's see, here's a comment that I want to make sure everybody understands is that -- so I think we're all comfortable with what's going in the Department of Defense.

Currently, there's been a lot of attention in what's going on in the Department of Homeland Security. We are optimistic in the parts of border security in which we operate. Our VACIS system, what we do relative to vehicle inspections, we believe that has a significant role to play in the vision of this government in securing the borders.

And so not only are we pleased with what we're seeing out of the Department of Defense, in those areas in our Civil business, where we have visibility into the budget, we are also quite pleased.

We think there was a large amount of fentanyl that was seized at the border a couple of weeks ago, and it is those technologies, which we think we will be able to provide to the government, and they will fuel our top line growth.

By the way, we kind of feel the same way about what's going on in DoD, DOE and FAA and a lot of the other civil organizations..

And then relative to the currency question, we don't see currency as being a material headwind or tailwind for 2019. There was a little bit of a headwind in 2018, but I wouldn't call it material with respect to the overall number. Just a reminder that international or foreign-denominated contracts are roughly 10% of our overall business..

Our next question is coming from Joseph DeNardi from Stifel..

Jim, I think you've talked in the past a little bit about your M&A focus and not having much of a desire just to acquire pure-play services businesses and maybe want to increase your exposure to products and hardware. I'm wondering if that means looking at services business that may have a product or hardware component to them.

Or whether you'd be willing to acquire kind of or look at pure-play hardware and products businesses?.

Joe, great question and the short answer to it is -- to both parts of your questions is yes. For us, we have less interest in a pure-play services business, especially one that looks, in terms of its customer footprint, a lot like us. We don't need more of what we've got. We can compete and expand the business that we have just fine on our own.

The things that we're looking for to build the company inorganically would be the kind of company with both a services and product, a product differentiator that bolts in well with the kind of work that both the target company and we do. A pure product company could also be of interest to us.

In -- although I would say that the ones that we've been interested in to this point tend to have some kind of service element to them, but I wouldn't say that we're not interested in -- I wouldn't say we'd shy away from a pure product business if it was strategically -- if it fit our strategic criteria..

Our next question is a follow-up from Jon Raviv from Citi..

Roger, in your prepared remarks, you had mentioned 2019 and beyond. Could you talk a little more about that beyond by any chance? Maybe a small preview for the event in May, especially now that the combination is done..

A little bit. We kind of came out of the merger and we talked about 3% growth and 10%. Of course, now we're printing a little bit better than that. And as you know, we're a long-cycle business and with $28 billion, if you take the $2.9 billion out for NASA NEST, $25 billion in unawarded. Most of that is going to impact beyond 2019.

The way things work, if they make an award to us this year, we ramp up. You really don't see those revenues until 2020 and beyond. And as excited as we are about 2019, if you just run your model as we do and run similar models, you can see that, that -- the submits, unawarded is going to have a larger impact on 2020 than it will on 2019.

And it's the government's need for the types of solutions that we provide that gives us enthusiasm about the future, and our strong balance sheet and cash conversion gives us the currency, if you will, to invest in the future and to grow the business.

And so as excited as I was five years ago when I came, as excited as I was about the merger with IS&GS, I look at the budget prospects and the needs of the government and 2019 is going to be an exciting year for us, but I think 2020 will be even better..

And to pile on there, Jon, about 2/3 of our pipeline is either new work or what I call OPB, other people's business. And so with 2/3 of that representing not -- things that are other than just keeping and recompeting our existing work, to Roger's point, I think that the profile of the pipeline certainly speaks well for some growth opportunity..

Our next question is a follow-up from Krishna Sinha from Vertical Research Partners..

I just wanted to get an update on capital deployment. Obviously, you've made some comments that you're going to try and maintain the dividend at a kind of steady rate.

But just focusing more on the buybacks and the M&A opportunity and how you're thinking about those in 2019, I mean, are you close to any sort of bolt-on deals or have any in the pipe that you think would close within the next 12 months that we should be aware of? Or are -- since you'll be generating cash here, should we think about the buybacks sort of staying at this pretty high cadence that you've been generating in the last 2 quarters?.

We are very comfortable with our leverage today, and we have plenty of dry powder and ability to take on more leverage, particularly at today's rates, to buy the right kinds of assets. But with that said, we're also not going to sit around waiting for something to come under contract before we make a decision on whether to deploy.

So you could see a year -- we could be looking back on 2019 as being a year when we made a couple of acquisitions or an acquisition. But we also were able to deploy capital with some buyback and the normal level of debt buyback..

Our next question is coming from Joseph DeNardi from Stifel..

My follow-up was going to be if, Roger, you can just talk about the sensitivity to a CR in 2020, and maybe just the mechanics of how that would look. I think kind of the impact to spending would be more pronounced because the budget would get set at the sequestration level whereas as FY '19 just got set at FY '18's level. So maybe I'm wrong.

Can you just kind of walk us through what your expectations there would be if there is a CR to start FY '20? I know it's a long way away, but just want to get your thoughts..

Yes, so you have it just about right. If we end up with a CR, we could snap back. And if we don't do this right, we could be back to the sequester caps and I touched on that in my remarks. I'm not the best person to predict what's going to happen in the government.

I will tell you I have been encouraged by what the Department of Defense has done and their ability to cross the river and talk to the hill and explain to our elected officials how important it is to get a budget. I've been optimistic before about the ability of the department to actually get a budget passed.

I'm also optimistic, moving into what is going to be a presidential election season, that people are not want to be distracted by a continuing resolution, which snaps us back to the sequester caps and requires the department to curtail programs.

And so if I was a pundit, I would tell you I think it's more likely that we're going to get some kind of a negotiation, and we will get a budget rather than a CR. But the mechanics of what happens in a CR, you have about right.

And if we win all the way back to the sequester caps, I think the department would have to take some significant measures to be able to get their budget back underneath that. As you know, once they start spending on aircraft carriers and F-35s and things, there's a future bill to be paid.

And when they commit to like a bulk buy or 2 aircraft carriers, that's with the assumption that they're going to get most of what they asked for in their budget request in the future. If you snap the budget back to sequester caps, they're already committed to build those aircraft carriers, and it creates a real planning dilemma for the department.

And because of that, because I think our elected officials understand the importance of defending the country, and they don't want this to become a topic in the presidential debate, I think we'll probably end up with a budget..

Thank you. We've reached the end of our question-and-answer session. I'd like to turn the floor back over to Kelly for any further or closing comments..

Thank you, Kevin. And thank you all for joining us this morning as well for your interest in the company. Have a great day..

Thank you. That does conclude today's teleconference. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today..